Two home loans = More tax benefit?

Our home loan expert Harsh Roongta spells out the tax benefits and deductions that you can avail, on your second home.

I have already taken a home loan from Standard Chartered Bank, and am getting tax. Now I plan to buy a second house at the same place. Will I get a tax benefit for the second house also? Can I claim the tax deduction for both houses? 

-- Manohar Raulji

Yes. You can get tax deduction benefits on the interest and principal paid towards the loan for the second residential property as well.

The popular perception is that there is an overall restriction of Rs 1.5 lakh for tax benefit on the home loan interest. This is not true. This restriction is applicable only for self occupied house property.

In fact, tax deduction is available for any number of properties and is without any limit under specific circumstances. The interest payable on a home loan is not directly deductible from your salary income (or business income).

The calculation of income from house property ie the rent you earn, has to be done separately for each property owned by a person. If such a calculation results in a loss, it is allowed to be set off against your income from other heads. Home loan repayments are eligible for deduction for each such property.  

How to calculate income from house property  

Rental income net of municipal taxes  (annual value)  = A   
 
Standard deduction at 30% of A = S  

Interest payable on home loan   = I  

Income from house property      = A - S -  I  = H  

Let's say you stay in a self-owned residence and purchase another property for self-occupation. You can still get a home loan for the second house. Provided, of course, the bank feels that you have enough income to pay off both the loans.

But, this time, the tax man will view it differently. This second house cannot be treated as self-occupied, since that is the status given to the first house and you can claim that status only for one house.

Here is where the favour from the tax department ceases. The tax department requires that you pay tax on the notional rent on at least one of the houses.

Notional rent

This is the rent you would have got, if you gave the house on rent.

As an owner of two homes, you can choose a 'self-occupied property' and the other will be taxed on the basis of notional rent. You can also change your choice from year to year. The income from such a home will be calculated using the above formula.

Since this house is treated as being rented out, for income tax purposes the deduction for interest is not limited to Rs 1.5 lakh in respect of loan taken for this house.  

The income or loss from the second house, calculated separately as above, is aggregated and the net result is the "income from house property".  
The entire principal paid on both the loans, will be eligible for deduction under Section 80C, subject to the overall cap of Rs 1 lakh.  

When you own more than one house, you may also be liable to pay wealth tax, if the net value of your loan, along with other assets chargeable to wealth tax, exceeds Rs 15 lakh.

Even for wealth tax purposes, the value of one self occupied house is allowed to be deducted.  

 

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